Agriculture: Deregulation cuts a swathe through dairy industry

by Peter Westmore

News Weekly, September 23, 2000

The destruction of the dairy industry — forecast in these columns in the run-up to the vote on deregulation last year — has commenced with a huge price-cutting war initiated by the Safeway-Woolworths supermarket chain, forced mergers threatened between large milk processors, dairy farmers facing a large price cut for contracted market milk, and “corner stores” left high and dry as they are undercut by the big supermarket chains.

Just two months after the national deregulation of the milk industry, Safeway cut the price of its Safeway branded milk in the Eastern states from $1.46 a litre to $1.19, a fall of almost 20 per cent, which was immediately matched by the other national supermarket chains, Coles and Franklins. Safeway’s two litre milk dropped by 66 cents, and its three litre containers by 90 cents.

Price-cutting war

The price drop is a result of a savage price-cutting war between the major milk processors, as they scramble to win contracts with the major supermarket chains.

In most states, Safeway is supplied by the NSW-based Dairy Farmers Co-operative, which has been losing market share in NSW and Queensland to two other major processors, the Victorian-based National Foods and the Queensland-based, but Italian-owned company, Parmalat.

Last year, the Federal Government engineered a $1.6 billion “adjustment package” for the dairy industry — funded by dairy farmers themselves by a levy on fresh milk — in exchange for the deregulation of the fresh milk industry, which had previously been subject to state regulation.

State-based regulation of the industry ensured that milk destined for the fresh milk market received a price premium, and limited the movement of milk interstate.

This protected higher cost producers in New South Wales, Queensland and South Australia.

The former Kennett Government in Victoria, along with the Federal Liberal Government, strongly promoted the national deregulation of the industry, as part of their ideological commitment to deregulation and National Competition Policy. They also pushed for the national adjustment package to assist indebted dairy farmers to leave the industry — principally in New South Wales and Queensland.

With the defeat of Mr Kennett in September last year, the Bracks Labor Government in Victoria handed the hot potato back to Victorian dairy farmers, who were given a vote on deregulation.

The dairy farmers were offered a poisoned chalice — vote in favour of deregulation and have access to the $1.8 billion “adjustment package”; or vote against it, and deregulation will be imposed without the adjustment package. The Victorian dairy farmers understandably voted in favour of it.

The chickens are now coming home to roost, with falling retail prices, processors in financial trouble with squeezed margins, and dairy farmers facing major cuts to their income.

The Victorian farmers’ newspaper, The Weekly Times, editorialised recently, “Even the staunchest farmer advocates for deregulation may be now wondering if their enthusiasm was slightly misplaced.”

The milk processors, who have been engaged in a cut-throat effort to survive in the deregulated industry, have been played off against each other by the supermarket chains.

National Foods’ share price peaked at $3.45 in March 1999, but has since fallen to just over $2. National Foods is now talking about a takeover of Dairy Farmers. In Queensland, the local processor, Pauls, was taken over by Parmalat in 1998, which a year later, attempted a takeover of the NSW-based Dairy Farmers Co-operative, which failed.

Early this year, Parmalat proposed a merger with National Foods, which also did not proceed.

The NSW Dairy Farmers Association has warned that the price war will threaten the future of many of the State’s dairy farms. Its President, Reg Smith, said, “Farmers will come under enormous pressure to take further price cuts as processors try to adjust to the new pricing regime.”

An industry observer, Peter Austin, wrote in the NSW farming newspaper, The Land, “It was always patently obvious total deregulation of the dairy industry — which took effect in all its glory on July 1 — could only result in one thing: the transfer of market power from the farmers (who needed it) to the processors and supermarkets (who didn’t).” (The Land, August 24, 2000)

The number of Australian dairy farms, which according to a recent report by the Bureau of Agricultural Economics, has fallen from 30,000 in 1974 to just 14,000 today, is about to suffer a further major exodus of farmers — as a result of this hare-brained scheme dreamt up by politicians and bureaucrats, whose free market ideology blinds them to the realities of how markets really work.